For the millions of small businesses in the country, the current mess in the banking sector and the entire Nirav Modi and Punjab National Bank (PNB) fiasco could not have come at a worse time. After the disruptions caused by demonetization and the Goods and Services Tax (GST), SMEs are looking to get a move on, for which they need funds, but it seems getting credit from banks will only get tougher.

As banks scramble to tighten their credit disbursal process, the ones most affected would surely be the small businesses. The now oft quoted figure from the Economic Survey this year has revealed that the amount of credit or loans disbursed by banks amounted to Rs 26,041 billion as on November 2017, but 82.6% of this was cornered by large enterprises. There is, however, now a robust alternate source of finance for small businesses to tap into.

"Non-Bank Finance Companies (NBFCs) stepped up financing of MSMEs after demonetization. NBFCs can be a very powerful vehicle for delivering loans under MUDRA. Refinancing policy and eligibility criteria set by MUDRA will be reviewed for better refinancing of NBFCs," said Finance Minister Arun Jaitley while presenting the Union Budget for 2018-19.

Delivering his Budget speech, Jaitley added that the, "Use of fintech in financing space will help the growth of MSMEs." A group in the Ministry of Finance is already examining how to take this forward.

Quoting the RBI on the role of NBFCs in SME financing, "Credit to the micro and small segments in both industry and services sectors displayed robust growth during 2016-17 reflecting the transient impact of demonetization," said the RBI. Where banks have failed, NBFCs have stepped in. Within the NBFC domain, peer-to-peer (P2P) lending can be revolutionary. Recently, RBI has recognized P2P lending platforms as NBFC-P2P and Faircent.com has already completed all formalities to register as a NBFC.

While there are many schemes running for decades that look to provide easy access to credit, it has remained largely elusive. Providing adequate and timely finance at a reasonable rate of interest has been difficult for banks because the cost associated with each loan is high. Step in online lending, technology that brought the two oldest financial activities - Borrowing and Lending - within easy reach of individuals. With lower overhead costs and ease of use, P2P lending platforms have been trying to fill the credit gap left by banks.

Delivering his speech at the third Bankers Borrowers Business Summit last year, the former Deputy Governor of RBI, SS Mundra said banks find it difficult to lend to SMEs because of, "Small ticket size loan which renders these accounts operationally less profitable, lack of information about the operations of these enterprises and financial illiteracy among the small enterprise owners. Due to unavailability of timely as well as flexible institutional credit, a number of MSMEs fail to tide over temporary setbacks and eventually have to shut shop." Mundra was spot on with his assessment, but the problem now is that the perceived financial risk associated with lending to small businesses has gone up several notches. When fraud of massive proportion hits a banking segment, the collateral damage is apparent.

As a
recent article in Economictimes.com pointed out, small jewelers, who want loans, are already feeling the heat as banks are not ready to lend. There is a strong chance the contagion will now spread.

However, P2P lending platforms are more than capable of meeting the demand. Most needs of SMEs center around having access to credit that can meet their operational needs. They need timely support at crucial junctures that can be delivered to them at speed. With technology, P2P platforms lending policies are in fact perfectly tuned to meet this need.

The biggest problem for banks is the lack of information for them to arrive at a decision. For new age fintech platforms like P2P, the digital exhaust for every business or individual is so big that it is not very difficult to arrive at a credit risk profile. Consider this, our technology-driven process of verification spans across more than 120 criteria and uses more than 400 data points basis the personal and financial information and documents provided by the borrower. This has meant, small businesses that deserve credit, but were previously refused due to want of information, can now find credible sources of funding.

For SMEs worried about access to finance, there are alternatives available and P2P platforms have the muscle and in fact are better suited to cater to the needs of the segment.

"Alternative finance tend to be more transparent about fees and eligibility as well as flexible in terms of payment," said Mundra. Simplification of the entire credit process has been the hallmark of P2P lending. The entire PNB fraud debacle can in fact be an opportunity for small businesses to try something new - to try something that is in sync with the times, their needs and aspiration.